You have /5 articles left.
Sign up for a free account or log in.

The array of different repayment options on federal student loans should be replaced with a single, income-based repayment system that automatically deducts payments from borrowers’ paychecks, according to a new policy proposal published Monday by the Brookings Institution’s Hamilton Project

The paper argues that the current federal loan system (including its income-based repayment options) does not do a good job of preventing defaults because it is too complicated and burdens young workers with large payments when they are least able to handle them.

Under the proposal, employers would withhold a fixed percentage from individuals’ paychecks in the same way they already deduct payroll taxes. Any outstanding loan balance that is not repaid after 25 years would be forgiven and the amount would not be considered taxable income, as it is under the federal government's current income-based repayment programs.

The authors of the proposal -- Susan Dynarski, a professor of public policy, education and economics at the University of Michigan at Ann Arbor, and Daniel Kreisman, who is a postdoctoral fellow at the same institution -- write that their plan is aimed at alleviating the burden on the vast majority of borrowers who have modest amounts of debt.

Although borrowing for college has drastically increased over the past several decades, the current system reflects “not a debt crisis, but a repayment crisis,” Dynarksi said Monday at a forum discussing the proposal.

“We have a repayment crisis because student loans are due when borrowers have the least capacity to pay,” she added. “It often takes years for college graduates to settle into a steady, high-paying job that reflects the value of their education.”

The paper also calls for tighter regulation of private student loans. The recommendations include allowing student loan debt to be discharged in bankruptcy and requiring students to exhaust their federal loan options before taking on private student debt.

Dynarski’s proposal is similar to programs that have been used in other countries, such as Australia, New Zealand and the United Kingdom. The state of Oregon is also weighing a plan that would allow students attending public institutions in the state to forgo upfront tuition payments and instead pay for their education with a fixed share of their wages for 25 years after graduation.

The proposal was one of three financial aid policy proposals released Monday by the Hamilton Project, adding to the growing pile of recommendations that foundations, think tanks and lobbying groups are issuing as Congress begins work on the renewal of the Higher Education Act.

Another one of the papers published Monday by the Hamilton Project called for a range of reforms to the Pell Grant that are aimed at boosting completion rates. It recommends federal funding for guidance and support services offered to Pell Grant recipients, a simplified and automated Pell eligibility process, and bonuses for recipients who complete a degree on time.

The report was written by Sandy Baum, a senior fellow at the Urban Institute and professor at the graduate school of education at George Washington University, and Judith Scott-Clayton, an assistant professor of economics and education at Teachers College at Columbia University.

A third paper, by Phillip B. Levine, an economics professor at Wellesley College, proposed that elite, private colleges be required to provide an online tool that allows prospective students to estimate the amount of aid they would receive from the institution. The tool, Levine said, is aimed at reducing the “sticker shock” that deters low-income students and would supplement net price calculators, which were required by the 2008 reauthorization of the Higher Education Act. 

Next Story

More from Student Aid Policy